The Ultimate Guide to a Non-Tax Capital Lease




Understanding a non-tax capital lease can provide you with the knowledge to help you make an informed and confident decision about how best to acquire the next piece of heavy equipment for your business needs. Keep reading to learn more about the critical information that sets non-tax capital leases apart from other financing options to the types of advantages they provide to your business.

What is a non-tax capital lease?

A non-tax capital lease is often referred to as a capital, finance or non-tax lease. This type of lease involves the lessor — who is the owner of the property being leased — financing the asset in question, which in this case is a piece of heavy equipment or machinery for your business. As AccountingTools explained, all other aspects of ownership then pass on to the lessee. In this context, that means your business.

An option to purchase the equipment or machinery for a reduced price at the end of the lease contract's term is a necessary condition for a capital lease, Investopedia said. Additionally, a capital or finance least must cover at least 75 percent of the equipment's projected useful life. That means, at least in terms of heavy equipment, that these leases tend to stretch across an extended period of time. Due to these conditions, a non-tax capital lease is often a good choice for companies that want to have a piece of heavy equipment available for the long term and eventually own it.

The structure of a non-tax capital lease means your business essentially owns the equipment involved for tax and accounting purposes, which assumes both the benefits and liabilities. That has some major impacts on your financial statements, including accounting for depreciation and interest expenses. Companies can generally receive tax benefits like expensing depreciation and the interest paid during the lease, but not the principal of the loan payment itself. This is an important to remember as you consider how your financial statements may be affected by a capital lease. 

How is a non-tax capital lease different from an operating lease?

One easy way to understand a non-tax capital lease is to compare it to the operating lease, another popular type of lease. The key differentiator for the non-tax capital lease is that the lessee is not granted ownership rights. This difference leads to a number of important considerations, including the responsibility of maintaining the equipment and returning it at the end of the lease, AccountingTools said.

The non-tax capital lease also allows most businesses to keep equipment and other assets from their balance sheets. Instead, equipment is listed as an expense on an income statement which enables the entire payment to be expensed for tax purposes. 

Additionally, an operating lease covers a term of less than 75 percent of the equipment's expected useful life, which means a shorter-term approach to leasing. To access the potential benefits of an operating lease, a company can't expect to hold on to the heavy equipment as long as it would with a non-tax capital lease.

Which is better, an operating lease or a capital lease?

It’s important to make the right choice for your business. It is best to identify the benefits and drawbacks of each lease option available and determine which will facilitate growth and keep your business moving forward. Here are some helpful questions to guide you during the decision-making process:

  • Do I need this equipment for a long period of time (capital lease) or a short period of time (operating lease)?
  • Do I want this equipment on my balance sheet (capital lease) or only listed as an expense on my income statement (operating lease)?
  • Is an option to purchase the equipment at the end of the lease important (capital lease) or not necessary (operating lease)?

The non-tax capital lease, and other equipment financing options from Cat Financial

Cat Financial offers a range of flexible leasing and financing solutions that meet the needs of businesses in industries that require heavy equipment. We call our non-tax capital lease a Finance Lease, offering attractive end-of-term purchase terms, 100 percent financing for qualified customers and many other benefits. You can also view our current special offers to maximize your savings. Want to request a quote from your local dealer? Simply follow this link and fill out the short form to put yourself on the path toward getting your business the equipment it needs!

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